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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Incentive payments/financial institutions: other inducements

These are incentives offered to members of building societies inducing them to vote for the demutualisation of the society, either by its conversion into a limited company or its take-over by a limited company. The incentives may take the form of:

  • a right to shares in the successor company issued at nil cost (referred to as ‘free shares’) or
  • a right to a cash payment from the successor company (referred to as a ‘cash bonus’).

This guidance looks at the Capital Gains Tax treatment of investors in a building society who receive either free shares or a cash bonus on a demutualisation.

This guidance does not apply to

  • bonus payments made following a merger of two or more building societies which are paid under deduction of income tax under the Income Tax (Building Societies) Regulations SI90/2231; for guidance on these see CTM49630.
  • cash payments made following a merger or take-over of two or more financial institutions other than building societies which have been paid under deduction of income tax as dividends or distributions. For guidance on the treatment of these payments please consult the relevant Manual or technical specialist.

Deposit account holders 

The Special Commissioners’ decision in Foster & Horan v Williams (SpC113) established that a deposit account represents no more than a simple debt. TCGA92/S251 (1) prevents a chargeable gain from accruing to the original creditor on a disposal of such a debt, see CG12615. This means that bonus payments in respect of deposit accounts are not chargeable to Capital Gains Tax.

Share account holders 

A share account is a chargeable asset for Capital Gains Tax purposes because the investor is a member of the building society.

The investor ceases to be a member on demutualisation and becomes a depositor with the successor bank. A deposit account will be opened in an amount equal to the closing balance in the share account on vesting day, ie the day on which the society transfers its business and assets to the successor bank.

The Special Commissioners’ decision in Foster & Horan v Williams (SpC113) established that when a share account closes there is a disposal of an asset for Capital Gains Tax purposes.

The acquisition cost of a share account is equivalent to the net closing balance in the account on vesting day.

Free shares 

Where a share account holder receives a right to free shares the consideration for the disposal of the account is an amount equal to the opening balance in the deposit account on vesting day plus the right to the free shares. As TCGA92/S217 treats that right as an option having no value a chargeable gain will not arise, see CG56820+.

The normal Capital Gains Tax rules apply when the shares are disposed of.

For further guidance on free shares see:

  • CG52500+ regarding shares issued following a company reconstruction or amalgamation, TCGA92/S135 - TCGA92/139
  • CG56800+ regarding shares issued following the transfer of a building society’s business to a company, TCGA92/S217.

Cash bonus 

Where a cash bonus is paid to a share account holder the consideration for the disposal is an amount equal to the opening balance in the deposit account on vesting day plus the cash bonus.

Indexation allowance up to April 1998 will be available if the share account was held at 5 April 1998, see CG17200+. Indexation allowance is calculated by reference to the dates when amounts were lodged in or withdrawn from the share account.